Corporate Social Responsibilities Essay
Social responsibility of business has been a subject of intense controversy and interest over the past four decades (Jamali 2008). The purpose of this paper is to critically analyze the two different views of social responsibility of business among scholars and business practitioners. The first is the shareholders view of Milton Friedman and another one is the stakeholder view of Bob Dudley, Group Chief Executive of BP Corporation.
I will outline key arguments and point out drawbacks of the two perspectives to clarify the underlying principles of business responsibility to society in theory and practice. These analyses will facilitate my recommendation of a mixture model of the two theories so that business not only obtain profits but also maintain sustainability development in the long term. 2. Review of the literature 2. 1. Defining The academic literature has highlighted the lack of consensus and the prevailing confusion in defining social responsibility of business (Ramachandran 2010).
Levitt (1958,) in his article ‘The Danger of Social Responsibility’, emphasized that social issues are the function of government, not job of business. Until between 1960s and 1970s, this period witnessed a significant expansion of academic interest in literature of corporate social responsibility. The theory was discussed and examined in depth, which lead to many debates on business managerial implications as well as introduction of related concepts of business ethics (Kakabadse et al. 2005).
The literature has been presented in various ways from the narrow economic perspective of maximizing shareholders’ wealth (Friedman 1970) or economic, legal and ethical aspect of responsibility (Carroll 1979) to a wider stakeholder perspective which involves other parties such as suppliers, customers and employees besides company shareholders (Freeman 1984). In the past ten years, social responsibility of business has been considered long term development of organization in term of corporate sustainability (Marrewijk, cited in Jamali 2007) or engagement of business in society as a good corporate citizenship (Hemphill 2004).
According to the Commission of the European Communities (cited in Cheers 2011), business is responsible to society when its operations activities are incorporated with social and environment issues as well as interact with stakeholders beyond legal obligations. These differences stem from various fundamental assumptions about what social responsibility entails. However, the interaction between business and society is a complex issue. It is more and more important to examine this relationship to define an effective model for each organization (Ramachandran 2010). 2. 2.
Critical reflection and analysis of the theory Milton Friedman, the representative of modern capitalism, won the Economics Nobel Prize for his big contribution in monetary history and theory, consumption analysis as well as stabilization policy in 1976 (Schwartz & Saiia 2012). Although Friedman shows little interests in social responsibility of business (Jones 2007), he presents a strong voice against social responsibility with his disputing statement, ‘The social responsibility of business is to increase its profits’ in his article published on the New York Time Magazines in 1970.
This statement followed his similar but less cited views mentioned earlier in his book ‘Capitalism and Freedom’ published in 1962. He describes that business has no responsibilities to society beyond that of maximizing profits for shareholders providing that these activities are complied with law and ethical rules (Friedman, cited in Jones 2007). Friedman’s view has had a significant influence on the theory of social responsibility.
He is considered a prominent representative for shareholders perspective, which almost the major articles or research on social responsibility of business at least referenced or challenged his view (Feldman 2007). It is critical to understand that Friedman presents a narrow view on social responsibilities of business in terms of narrow objectives of shareholders and narrow responsibilities of company executive (Lee & McKenzie 1994). Firstly, Friedman de-assembles the personification of organization into individual executives (Jones 2005).
He claims that only individual may have social responsibility because business is an artificial person under the law (Friedman 1970). According to Friedman, the company is owned by the shareholders who are motivated entirely by profit maximization. In other words, Friedman had portrayed business as self profit-pursuing; other issues of the outside society are responsibility of society, not of business (Grant 1991). ‘The individual as the ultimate entity in the society’ (Ghoshal 2005, p. 83), as a result of that, all ethical issues should be left for individual handle.
Therefore, if the shareholders or company executive wish to engage in social responsibility, they should do it separately and at their expenses but not though social responsibility of business. It can be argued that according to Friedman theory, shareholders of a corporation have no duty to instruct the company executive to exercise social responsibility (Schaefer 2008). The key message of Friedman indicates that business should focus on increasing its profits to generate best benefit to society (Drucker, cited in Jones n. ). This argument supports “the principle of freedom” (Cosans 2009, p. 392) in society of Friedman. He concedes that business engagement in social responsibility indeed undermines the primary foundation of free society (Ghoshal 2005). This view also follows the ‘self-interest’ doctrine (Cosans 2009,p. 392) of Adam Smith, in his book ‘The Wealth of Nation’, he acknowledges that individual pursue their own interest is actually the best thing that person can contribute to society.
Business is also the same. When business is free to pursue profits, it is eventually beneficial for both its own and society interest and ‘invisible hand’ will regulate to accelerate social benefits (Cosans 2009). However, it should be noted that when there are many large corporations operate in society, the mechanism of “invisible hand” become less credible because their dominant power influences on communities and increase social inequalities instead (Schaefer 2008).
Secondly, adopting the Agency theory to explain, Friedman acknowledges that the responsibility of corporate executive is a fiduciary one to serve as an agent to the principal who are company shareholders. It is implied that the corporate executive have no other responsibilities than the only duty they have with their shareholders, that is to increase shareholders value returns as much as possible (Schaefer 2008). As a role of an agent, the corporate executive should not try to spend money of shareholders in the exercise of social responsibility.
If they try to do different, it would be harmful to shareholders and society because these activities will result in inefficiency increase and lost production. As a result of that, business may suffer loss or even collapse due to adverse effects of social responsibility (Schaefer 2008). It means that social responsibility brings no benefits to business (Feldman 2007). However, shareholders actually do not own the business; they merely own a right to the cash flows of the company (Ghoshal 2005).
Hence, the corporate executive should perform other responsibilities to manage company activities instead of being ‘obsessed with’ the profit maximization to shareholders (Grant, cited in Cosans 2009). Although Bob Dudley, Group Chief Executive of BP Corporation concedes the same view with Friedman about a key function of business, that is generating profits to shareholders; he presented a broader view about relationship between business and society.
He stresses that business activities also aims to create benefits to society and people because business is a part of society (Dudley 2011). Being a part of society, the firm cannot ignore the context in which it operates. This broader stakeholder view emphasizes on the importance of taking the benefits of other stakeholders such as customers, suppliers, employees, managers rather than only shareholders into consideration when making business decision (Freeman 1984) because the values of company created through the resources contributed by different parties (Goshall 2005).
If business fails to satisfy the wishes of other parties, this may result in failure to maximize profits to shareholders instead (Jamali 2007). In other words, even when a business seeks to serve its shareholders as a primary concern, its success in doing so is likely to be influenced by other stakeholders (Freeman et al. 2004). However, it should be noted that business seems to incur costs when exercising social responsibility from stakeholder perspective. These costs somehow affect the value returns to shareholders.
Therefore, it would be difficult for company leaders to balance the competing interests of shareholders, employees, customers, suppliers, and communities in the process of decision making (Marcoux, 2003). Besides that, it is also a challenge for business to set priority based on the importance of every stakeholder. There would be the case when some stakeholders were satisfied while others would be disappointed (Jensen, 2002). In this case, the shareholder view seems to be more practical when examined from a long term perspective.
It provides the best mechanism for business leaders to balance the contrasting interests of different stakeholders when making business decisions rather than stakeholder view (Danielson et al. , cited in Cheers 2011). While Friedman (1970) minimizes business activities only at a level of complying with legal regulation and ethical rules to fulfil its social responsibility, Dudley (2011) acknowledges that the company should conduct its activities beyond that of stated in law. Being socially responsible is voluntary effort by which the firm acts beyond what is stated in law.
It is ambiguous when Friedman only indicates the idea of ethical rules but fail to outline content of what is inclined to ethical custom (Feldman 2007). It can be indicated that according to Friedman, business is somehow permissible to engage in the activities such as overcharging customers, downsizing without notice, treating suppliers coercively etc in order to gain profits (Schaefer 2008). 3. Practice relevance Social responsibility of business has received much more significant interests among business practitioners so far (Branco & Rodrigues 2006).
Although many corporation leaders have rejected the notion of social responsibility from its inception, business is increasingly under pressure to reconsider ethical consequences of their activities. Besides company shareholders, external stakeholders and the environment have become important influencers of organization practice and processes (Freeman et al. 2004). However, the doctrine of social responsibility in terms of implementation and benefits may vary according to the characteristic practices of particular industry.
The country or region in which the firm is located also has a significant impact on social responsibility behaviour and practice of business (Lee, cited in Cheers 2011). A study from the Journal of Business Ethics indicated that this factor can accordingly affect the components, level and motives of social behaviour of organization (Sotorrio & Sanchez 2008). It is likely that the shareholders-focused model is not as popular in some European countries and Asia as it is in the United States (Kakabadse 2005). The difference exists because it is the Unite States where the shareholders theory first introduced and implemented.
In contrast, European firms, due to many other influential factors, have to satisfy broader stakeholders in terms of more demanding consumer desires, stronger media pressure, and more rigorous governmental regulations relating to social responsibilities of business (Cheers 2011). However, it is necessary to re-examine some recent Americans corporation scandals including Goldman Sachs, Enron, Worldcom and Tyco, which resulted in the global financial crisis in 1998. The collapse of these big corporations has called for public attention in the sustainability of business.
It is claimed that this failure exposes the inefficiencies of shareholders theory because these companies focused on maximizing short term values to shareholders (Freeman et al. 2004). It is even worse when these organizations engaged in fraudulent activities; they had promoted personal interest above the shareholders’ welfare. Another reason was pointed out that this failure is due to bad theories which were taught in almost business school result in bad management practice because of ‘the pretence of science’ (Ghoshal 2005, p. 9), moral and ethical considerations were excluded in the management theories (Ghoshal 2005). It is generally accepted that stakeholder theory has gained currency in business and academic literature in recent years in light of its practicality from the perspective of managers and scholars (Jamali 2007). Corporation does not pursue only short-term profits but rather long term objectives to sustain and prospect in a challenging environment (Kakabadse 2005). The social responsibility of BP Corporation after an Oil Spill in 2011 had best demonstrated this practise.
BP corrective actions were beyond normal legal compliance, they made quick support to their employees’ family and friends, who were died in the explosion; they took all necessary measures to protect the shore and support environment and citizens affected. As a result of that, BP suffered a substantial loss in term of returns values to shareholders. However, the company even decided to postpone dividend payments to shareholders in order to concentrate on all on-going corrective measures.
The decision was made with a view to maintain the reputation of BP organization for long term development instead of pursuing value returns to shareholders. It is even more important in our contemporary economic nowadays, when social responsibility has become a strategic part of business. It has played a vital role as dynamic capabilities to help business to compete in the fierce environment. On the one hand, it enriches the corporate capabilities in term of corporate culture reputation, know-how and technology.
On the other hand, organization reputation will help to improve relationship with external parties such as authorities, investors, partners, enhancing loyal employees and customers. These factors are in turn attributable to increase long-term dividends (Branco and Rodrigues 2006). However, there are another trends in social responsibility practice of business recently when many organizations, though advocate social responsibility in theory, they tend not to accelerate stakeholder welfare at the expense of shareholders funds.
These businesses may use media to promote their social responsibility commitment and efforts to promote their reputation in society to achieve competitive advantage. However, their main focus is still to generate as much profits for company owners as possible. This practice is known as “green washing” where these businesses are not pursuing social responsibility instead of contributing to good society but to make use of it to increase its businesses profits (Karnani 2010). 4. Implication of literature
The literature is still a controversial topic among academic scholars and business practitioners. Firstly, from different perspectives, social responsibility still seems a voluntary job of business. It is at the shareholders’ discretion to engage in social responsibility and do beyond what is stated in law; especially when they seek to exercise social responsibility in order to improve their financial position. The relationship or interaction between business and government is still open.
The question is that whether it is necessary to have intervention of government or institutional organizations in regulating or reinforcing social responsibility behaviour and practices of business. This would be important because there are some typical industries or businesses whose operation activities strongly affect surrounding community and environment. In this case, it is important to define the extent of involvement of government and institutional organizations in business activities instead of expecting voluntary response from business.
Even if when business just focus on profits and leave social issues to the hand of government, it would be a challenge especially when businesses are operating in countries with chaos in term of corrupt regimes to enhance legal standards. As Schwartz and Saiia (2012) argued, in such countries, business cannot rely on governments to protect their activities because the government is typically focused only on maintaining control and order. In such cases, organization should have an ethical obligation not to enter or to refuse to do business in such countries instead.
Secondly, the agency theory has discounted the role of corporate executives and leaders in decision making process (Schaefer 2008). Their roles should not only limit at following shareholders’ instruction. It is important that the executive should be more active in bringing upward recommendations and consultation about the best social behaviours and practices in each situation to shareholders instead. Besides that, the corporate executives should both have ability to efficiently manage organization to maximize profit but also understanding requirement of social responsibility to exercise all other responsibilities.
This is very important when the corporate executives have to face with difficult situations which require them to balance different benefits of various stakeholders especially when there is disagreement among the shareholders whether business should engage in social responsibilities or not. Another reason is that once business exercises social responsibility, businesses are faced with the contradictory situation of having to engage in social issues on the one hand and maintaining profitable on the other hand.
It is responsibility of corporate executive to identify ways in which social goals can be pursued in ways that would not adversely affect profits to increase the competitiveness of business. Therefore, the role of corporate executive should be carefully re-assessed instead of only acting as an agent to company shareholder. 5. Conclusion There has been no census in defining social responsibility of businesses, the two dominant views in terms of maximizing profits to shareholders and considering benefits of broader stakeholders when doing business had strong impact to business leaders in the process of decision making (Schaefer 2008).
Although stakeholder perspective becomes more favourable in business world, each perspective is insufficient when examined separately. While Friedman’s views on business responsibility to society have validity, his ethical constraints are insufficient for business to properly obtain competitive advantages and sustainability development in long term (Schwartz & Saiia 2012); the broader views of stakeholder disadvantages in efficiently prioritizing the importance of all the stakeholders involved as well as controlling any adverse effect in term of financial costs affecting to business profits.
Therefore, firms should comply with the law, act according to ethical rules, apply social responsibility as a dynamic capability to win in competition and sustain long term development on a condition that these activities help to increase shareholders’ wealth. This would bring significant benefits to both businesses and society. In other words, it is only when businesses are profitable and fulfils their legal, economic, and ethical obligations that they can be said to be “socially responsible. As such I would suggest that the appropriate approach is a reasonable synthesis between Friedman’s narrow perspective and a broader social responsibility position of Dudley. Besides that, it is also very important for business to focus on the role of corporate executive and the government when exercising social responsibility in order to gain the best returns for both business and society.